Omar Aguilar, chief investment officer
at Charles Schwab, tells MarketWatch's Jonathan Burton investors are
transitioning to a search for growth from a flight to quality.

Yet there may be a way to get the benefits of ETFs without the risks of frequent trading. A type of investment vehicle called ETF managed portfolios could save you money — and save you from yourself. At least, that’s the promise.

Free-range portfolios

In a recent study, investment researcher Morningstar Inc. says these managed ETFs — defined as “investment strategies that typically have more than 50% of portfolio assets invested in ETFs” — have become “one of the fastest-growing segments of the managed account universe.”

Morningstar keeps track of nearly 370 managed strategies provided by 95 financial-service firms; together they held $27 billion of assets last September, a 43% increase over 12 months. All told, Morningstar estimates that between $40 billion and $100 billion is kept in ETF managed portfolios, which are primarily available as separate accounts.

Most ETFs are passively managed index-tracking funds. That would make these managed portfolios best suited for investors looking for top-down, big-picture managers who see asset-allocation decisions as the route to outperformance rather than security selection.

It makes sense, then, that global strategies represent for more than 70% of the assets investors have tucked into ETF managed portfolios. Such funds would be related to world-allocation mutual funds, a typically free-ranging group known as “go-anywhere” funds.

“Morningstar and academic research have shown that asset allocation is as important as security selection in determining portfolio total returns,” the study notes. “A prudently constructed portfolio of ETFs provides wide asset-allocation options and low-cost diversification. ETFs provide transparency, intraday liquidity and portfolio consistency to strategists allocating among various asset classes and subclasses.”

Performance peek

Fine, but do ETF managed portfolios perform well enough to justify that sanguine outlook? The truth is it’s too early to tell. Too few of the portfolios have track records of three years or longer to draw meaningful conclusions.

That said, ETF managed portfolios are holding their own against equivalent mutual funds. Portfolios in several categories — all-assets, global balanced and global equities — outpaced the average mutual fund of the same flavor over the 12 months through last September, Morningstar’s figures show. ETF portfolios specializing in U.S. equities and global bonds underperformed related mutual funds, however.

At this point, neither form of portfolio is clearly superior to the other. Also not clear is just what an investor in an ETF managed portfolio is getting. That’s a result of the ease of trading that is a hallmark of ETFs, combined with a tendency of product providers to concoct indexes, and ETFs based on them, as the need or desire arises.

“This tactical ability to quickly change a portfolio profile can be a double-edged sword,” Morningstar observes. “On the one hand, the investment managers can nimbly and cheaply reposition a strategy to adjust to an ever more rapidly changing investment landscape. On the other hand, it [can be difficult] to choose the most suitable strategies . . . and properly frame potential return expectations.

“Periodic portfolio disclosures may be of little use . . . if the portfolio has since been significantly changed. Muddying the waters even more, strategy providers also have littered the landscape with a myriad of blended benchmarks, [which] makes understanding, let alone comparing, strategies across the space difficult.”

The universe of ETF managed portfolios is going to expand further and the funds will log longer performance histories. As they do, number-crunchers will figure the right way to characterize and classify them and determine which managers are better than others.

Until then, you’re probably better off in broadly diversified mutual funds or in managed accounts that pick and choose among them.

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